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Fuel Freedom Staff

General: Dependence on oil a ‘serious’ national security threat

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With gasoline prices at five-year lows, it’s easy to lose sight of the realities of U.S. dependence on oil. We’re still beholden to other nations for much of our supply; we still have to expend much energy and resources defending the free flow of oil around the world; and we still need the long-term solution of alternative fuels to keep prices low.

One person who’s done a lot of thinking about this is retired U.S. Air Force Gen. Ronald Keys, who lays out the argument for reducing our consumption of oil in a guest piece for The Hill. Keys, who spent 40 years in the Air Force (and flew combat missions in Vietnam), is now chairman of the Military Advisory Board at the CNA Corporation, a nonprofit military research group.

Keys writes:

Our nation’s over dependence on oil is a serious threat to our national security—militarily, diplomatically, and economically. It limits our ability to act on the world stage and increases the likelihood that we will send Americans in uniform into harm’s way. It leaves us open to impacts from wildly gyrating prices …

And:

Importing less oil will loosen the bonds that tie us to regimes that don’t always have our nation’s best interests at heart. That will make it easier for the United States to act in its own national interest on the world stage, and make it less likely that we will have to send troops to defend the free flow of oil.

And:

Oil prices will always fluctuate, but the need to cut our nation’s oil dependency will endure. This need doesn’t get any less urgent just because pump prices tick downwards for a while.

Arctic Leaf

Can ethanol benefit from a drop in oil prices?

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A new school of thought has emerged that ethanol may actually benefit from the recent fall in oil prices, to nearly half their level of a few months ago.

The main exponent of this theory is Andrew Topf, writing on OilPrice.com. His logic is sound, and there are a few recent developments to back him up. It isn’t a sure thing, but there is a strong possibility that ethanol could emerge from the current oil price plunge as a winner.

Here’s the argument Topf makes: He acknowledges that ethanol prices have fallen along with gas prices, so the market doesn’t look very promising. Also bedeviling the industry is the foot-dragging by the Environmental Protection Agency, which has not yet set a renewable goal for ethanol for 2014. The EPA is supposed to set a number every year that specifies how much corn ethanol will be consumed. This is supposed to be enough to meet the 10 percent standard that ethanol is supposed to meet in replacing gasoline every year.

Buffeted by this uncertainty, however, the industry has taken its own initiative and started exporting ethanol. To its surprise, the market has proved very favorable. Canada, the Philippines and Japan have all proved to be receptive to the idea of stretching their gasoline supplies with ethanol. Green Plains, Inc., one of the major U.S. producers, is going to export 15 percent of its product in the fourth quarter of 2014. “We are booking export sales into 2015, extending into the third quarter of next year,” Green Plains president and CEO Todd Becker told investors in a conference call in October. “We typically have not seen export interest that far out in the future.”

The U.S. has pursued contradictory policy on ethanol from the beginning, giving the encouragement of the 10 percent mandate, coupled with subsidies and tax breaks going back to the 1990s. Then became President Bush’s mandates, which guaranteed a market for ethanol through 2023 and also specified a market for cellulosic ethanol, which has never materialized — even though the EPA has charged refiners for a product that didn’t exist.

So what will happen with ethanol amid falling oil prices? One straw in the wind came in South Bend, Indiana, where a corn ethanol plant that had been closed for several years finally reopened. The chances for the plant to succeed are much greater now that corn prices are at their lowest in five years, Purdue University agricultural economics professor Christopher A. Hurt told The Times of Northwest Indiana. “I think the prospects appear to be quite favorable for that plant if they can get it up and running as quickly as possible,” he said. And that doesn’t take into account the possibilities for export to countries that are dependent on imported oil.

The ethanol effort is often criticized as one that wouldn’t even exist were it not for government support that has boosted it all the way. The entire farm bloc are now supporters of ethanol. However, to everyone’s surprise, when the subsidies ended, ethanol production kept increasing!

Now that ethanol has found a market abroad, it is possible that even amidst falling oil prices, the industry will be able to even keep growing. Ethanol still has a high octane level and substitutes for much more noxious chemicals by blending with gasoline. Its role as at least a 10 percent additive seems secure. Now let’s find out if ethanol can find a place in the world market as well.

Fuel Freedom Staff

Saudis might actually increase oil output

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Saudi Arabia isn’t cutting production anytime soon, despite lobbying from some of the 12-nation cartel’s members to try to stem falling oil prices. In fact, the Saudis might actually boost output to gain new customers.

Reuters reported that Saudi Arabia’s oil minister, Ali al-Naimi, said it’s not in OPEC’s interest to cut production quotas no matter how far prices fall:

After a weekend of comments from several Gulf OPEC members reiterating their intent not to intervene in oil markets, despite oil prices that have halved since June, Ali al-Naimi told the Middle East Economic Survey it was “not in the interest of OPEC producers to cut their production, whatever the price is” — his starkest comments yet.

Naimi also said the Saudis might boost output instead to grow their market share and that oil “may not” trade at $100 again. “The best thing for everybody is to let the most efficient producers produce,” he told a conference in Abu Dhabi at the weekend.

Olivier Jakob, an oil analyst at Petromatrix OIl in Switzerland, commented in an earlier version of the Reuters story:

“We are going down because you have some OPEC ministers who come every day making statements trying to drive the market down. … They come every day to convey the message that they are not doing anything to restrict supplies and that they basically want oil prices to move lower to reduce production in the U.S.”

Brent crude dropped $1.33, to $60.05.

Fuel Freedom Staff

Ben Casselman: The conventional wisdom on oil is always wrong

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This is something we knew already: Oil prices fluctuate. Like all commodities, prices go up, and then they go down, and few experts know exactly why, or how far, or for how long trends will endure.

But FiveThirtyEight.com’s Ben Casselman, who used to cover the oil patch for The Wall Street Journal, outlines (in typical well-executed FiveThirtyEight style), all the ways that people have gotten oil predictions so horribly wrong this year.

Here’s one of the many instructive passages from his piece:

It isn’t just that experts didn’t see the shale boom coming. It’s that they underestimated its impact at virtually every turn. First, they didn’t think natural gas could be produced from shale (it could). Then they thought production would fall quickly if natural gas prices dropped (they did, and it didn’t). They thought the techniques that worked for gas couldn’t be applied to oil (they could). They thought shale couldn’t reverse the overall decline in U.S. oil production (it did). And they thought rising U.S. oil production wouldn’t be enough to affect global oil prices (it was).

Now, oil prices are cratering, falling below $55 a barrel from more than $100 earlier this year. And so, the usual lineup of experts — the same ones, in many cases, who’ve been wrong so many times in the past — are offering predictions for what plunging prices will mean for the U.S. oil boom. Here’s my prediction: They’ll be wrong this time, too.

Among the many reasons why pundits’ crystal balls are so often murky: various factors go into the makeup of prices; and the economics of oil-field drilling are complicated, which is why even “break-even” declarations about when oil-shale drilling in Texas or North Dakota might become unprofitable can be off base as well.

As to the first point — all the factors that comprise the fluctuating price of oil — Cassleman writes:

In July 2008, my Journal colleague Neil King asked a wide range of energy journalists, economists and other experts to anonymously predict what the price of oil would be at the end of the year. The nearly two dozen responses ranged from $70 a barrel at the low end to $167.50 at the high end. The actual answer: $44.60.

It isn’t surprising that experts aren’t good at predicting prices. Global oil markets are a function of countless variables — geopolitics, economics, technology, geology — each with its own inherent uncertainty. And even if you get those estimates right, you never know when a war in the Middle East or an oil boom in North Dakota will suddenly turn the whole formula on its head.

But none of that stops television pundits from making confident predictions about where oil prices will head in the coming months, and then using those predictions as the basis for production forecasts. Based on their track record, you should ignore them.

Fuel Freedom Staff

Oil prices surge after taking a hit this week

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We’ve heard a lot about psychology in oil prices lately.

Some stories mention the “psychological” threshold of $60 a barrel. Well, many psyches were put on edge this week, as Brent crude closed below that mark on Tuesday and Thursday, territory it hadn’t seen since May 2009. But it surged $2.11 to $61.38 Friday, a gain of 3.4 percent.

U.S. crude (WTI, or West Texas Intermediate) rose $2.41, to $56.52, up 4.5 percent.

Has oil started to climb back up again after hitting the ceiling? According to Reuters:

While some traders may be betting that $60 a barrel Brent represents a likely floor for the market, others remain unconvinced. With uncertainty high, demand for options has surged this week, with the CBOE crude oil volatility index soaring to its highest since 2011.

“This is a surprisingly forceful run up as fundamentally nothing’s changed in this market in terms of supply-demand,” said Gene McGillian, senior analyst at Tradition Energy in Stamford, Connecticut.

“I think the switch in WTI’s front-month and the second short-covering act for the week kind of got overblown.”

 

Fuel Freedom Staff

Here’s why air fares aren’t going down, despite cheap fuel

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Drivers are loving life whenever they fill up at the gas station. According to AAA’s Daily Fuel Gauge Report, the national average Thursday was $2.477 for regular 87-octane gas. That’s down 23 percent from the same time last year, when the average was $3.216.

So why haven’t air travelers seen similar savings on airline tickets? After all, fuel accounts for between one-third and one-half of the entire cost of running an airline, and the jet-fuel prices have fallen at the same pace as automotive gasoline, down 32 percent over the last year.

And yet not only are airlines not discounting fares, they’re counting their winnings after years of economic struggles: Slate’s Josh Vorhees reports that airlines in North America expect their profits to grow from $11.9 billion in 2014 to $13.2 billion in 2015. The trade group Airlines for America said in a statement that its members are re-investing in 317 new planes, better amenities for passengers, dividends for shareholders and employee benefits. The group added that:

Air travel remains one of the best consumer bargains, given its superior speed and price compared with other modes of transportation. From 2000-2013, U.S. Consumer Price Index rose 35 percent, whereas average domestic airfare rose 15 percent. Thus, adjusted for inflation, the average round-trip domestic fare fell 15 percent.

When the airline industry is financially healthy, everyone wins. Airlines should be treated like every other business. When the price of coffee beans falls, no one asks Starbucks why his or her latte does not cost less. …

Here are three big reasons why airline customers aren’t seeing cheaper fares:

  • Many airlines buy fuel ahead of time, locking in a fixed price for six months or longer. It’s called “hedging,” and although not every airline does it (American doesn’t, and it’s reaping a windfall), it explains why some travelers are still being hit with fuel surcharges. Sen. Chuck Schumer wants the federal government to investigate the industry: “Ticket prices should not shoot up like a rocket and come down like a feather,” he said.
  • Supply and demand. Where’s the incentive for airlines to reduce fares when their North American planes are filled to 85.1 percent capacity? As The New York Times notes in an editorial, “a series of megamergers has significantly reduced competition in the industry. The four biggest airlines in the United States — Delta, Southwest, United and American — control about 80 percent of airline capacity, down from 11 companies as recently as 2005. For most travelers, that has meant higher prices and jam-packed planes.”

It’s impossible to predict where fuel prices will be in the new year, and airline executives might be reluctant to reduce fares now, only to have to hike them again in a few months. Alexandre de Juniac, head of Air France-KLM, told The New York Times that oil might be between $70 and $80 a barrel next year (it’s below $60 now). But he added: “Obviously, no one really knows.”

Fuel Freedom Staff

Does Keystone XL even make economic sense?

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A story in The Los Angeles Times asks a pertinent question: With the price of oil low (by recent historical standards) and continuing to fall, do the economics of the proposed Keystone XL pipeline even make sense anymore?

After all, it’s expensive to extract the kind of tar-sands oil in western Canada that would flow through the pipeline, and the price of oil has to be a certain level for the process to be profitable.

That’s why even pro-business people who are in favor of oil production are questioning whether the pipeline extension — which would be built from Canada to Nebraska, linking up with an existing line to the Gulf of Mexico — would reward investors.

With the GOP about to take control of both houses of Congress, backers of the pipeline say they are close to having a veto-proof majority for a bill that would order the Obama administration to give the project the federal permit required for pipelines that cross a U.S. border.

But “the political debate is not paralleled by the realities” in the market, said Sandy Fielden, director of energy analytics at Texas-based RBN Energy. “The economics of this project are becoming increasingly borderline.”

President Obama could use his veto pen to scuttle the legislation, but the State Department will ultimately have the final say on whether the pipeline gets approved. TransCanada Corp. still wants to build it, and GOP leadership still wants to get it done as well, economics or no.

TransCanada says investors still want it, because they’re thinking long-term and aren’t concerned about a short-term glut of oil that has suppressed prices.

“We sign binding, long-term commercial agreements with our customers so they can reserve space to deliver the crude oil they need to their customers,” Mark Cooper, a spokesman for TransCanada Corp., which would own the pipeline, wrote in an email.

The oil shippers investing in the pipeline, Cooper wrote, “have a good understanding of what the market needs over time. They do not make decisions based on short-term views or changes in commodity prices.”

 

Fuel Freedom Staff

Crude falls again, IEA cuts outlook for demand growth

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The price of oil continued falling Friday: Brent crude, the international standard, dropped nearly $2, to $62. U.S. WTI crude dropped $2.14, to $57.81, its lowest price since May 2009.

A story by Reuters and CNBC notes that the International Energy Agency is predicting further downward pressure, owing to slack demand:

The IEA, which coordinates the energy policies of industrialized countries, cut its outlook for global oil demand growth for 2015 by 230,000 barrels per day (bpd) to 900,000 bpd on expectations of lower fuel consumption in Russia and other oil-exporting countries.

Fuel Freedom Staff

Market Watch: Here are the reasons oil is plunging toward $60

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[Slideshow] Oil’s stunning price collapse is undoubtedly one of 2014’s top stories and will remain a major theme for investors in 2015. Here’s a look at the factors that have led to the largest price decline since the 2008 financial crisis.

Indeed, oil futures CLF5, -2.94%  have plunged 39% from the beginning of the year, including carnage in Thursday trading that saw oil settle below $60, at $59.95, marking its lowest settlement price since July 14, 2009, while Brent LCOF5, -1.62%   is down about 42% for the year (though marginally higher in Thursday trade).

Read more at: MarketWatch

Fuel Freedom Staff

Oil falls again, bank says floor could be as low as $43

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The price of Brent crude dropped $1.77 a barrel on Monday, to $67.30. Earlier in the day it had hit $66.77, its lowest mark since October 2009.

BBC News has coverage here, and CNBC here.

Traders reacted to a report from Morgan Stanley citing fears of a global oversupply. According to BBC:

Morgan Stanley predicted that Brent would average $70 a barrel in 2015, down $28 from a previous forecast, and be $88 a barrel in 2016.

The investment bank also said that oil prices could fall as low as $43 a barrel next year. Analyst Adam Longson said that markets risked becoming “unbalanced” unless the OPEC producers’ cartel decided to intervene.